J Darrin Gross Podcasts

Jeff Love  0:00  

New entrepreneurs, new real estate investors they want to partner up. It’s it’s a conversation to have is what happens if that partner is gone. So for example, your partner, you start a real estate investment company, you buy a five unit building with a partner, that partner passes away.  Well, does his interest, go to his his children? Does his interest go to his spouse?  If it’s an operating company and you’re actually doing further projects and you’re actually working for the company rather than a passive investment, it becomes a really important question. Because that partner, spouse or children, they may not know about the business. They may not bring anything from an operational standpoint, and you may not get along. 

Announcer  0:44  

Welcome to CREPN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant We are here to learn from the experts.

J Darrin Gross  1:03  

Welcome to Commercial Real Estate Pro Networks CREPN Radio. Thanks for joining us. My name is J. Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly, we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio. Today, my guest is Jeff Love. Jeff is a partner at Gibbs Giden Attorneys at Law, and they focus on real estate transactions. Rather, Jeff does focus on real estate transactions. In just a minute, we’re going to speak with Jeff about how to negotiate a lease on your terms. As a real estate investor without being a jerk. We can also talk to them about what to look for in your purchase agreement in a commercial real estate transaction. And gone but not forgotten. What happens to a partner share in your business when they leave or die. But first, a quick reminder, if you like our show, CREPN Radio, there are a couple things you can do. You can like, share and subscribe. And as always, we encourage you to leave a comment, we love to hear from our listeners. Also, if you want to see how handsome our guests are, be sure to check out our YouTube channel. You can find us on youtube at Commercial Real Estate Pro Network. And also if you would please subscribe. The more more subscribers the more often people see us and helps the algorithm etc etc. With that, I want to welcome my guest. Jeff, welcome to CREPN Radio.

Jeff Love  2:51  

Thank you for having me.

J Darrin Gross  2:53  

Well, I’m looking forward to talking with you today. And but before we do if you could take just a minute and share with the listeners a little bit about your background.

Jeff Love  3:05  

Absolutely. So I’m a I’m a real estate guy down to down to the bone, always wanted to be in commercial real estate. So I actually went to law school to learn more about the law. But really what goes into a transaction, what goes into a corporate deal a real estate deal with the intention that after law school is going to practice, be a lawyer for a couple years and go off and be you know, be a real estate developer. And after law school I graduated, you know, was another recession.  Ended up going to work for two different companies, a scrap metal recycling company. And then I moved over to the real estate developer and knew I hit the right spot. I loved what I was doing. But I wanted to work with different types of clients, big ones, entrepreneurs, startups established companies doing leasing and purchase and sales and financing. And so I left my my job with the developer, I came to my current firm. And that’s what I do on a daily basis. We have clients that are just starting out in real estate to fortune 100 companies and we help them with purchases and sales, doing leasing, financing deals syndication, corporate structuring. So I really get to deal with all aspects of a real estate deal. And that has been really fun for me, because I get to see all parts of the deal. Rather than doing one transaction with one client, I get to help many different clients and different parts.

J Darrin Gross  4:38  

Now, that’s great. I really appreciate that wide perspective. I think so often. You know, people get going in a particular angle a particular direction or specialize and they may not come in contact with somebody that that has a broader picture because they’re trying to get their one thing done and they may not I think to ask questions that could help them, you know, whether it be right now or in the future or, you know, a lot of times people don’t understand that the the exit plan is critical to getting started. So I’m assuming you have some insight on that.

Jeff Love  5:19  

Absolutely.

J Darrin Gross  5:23  

So, let me ask you, how long have you been practicing law?

Jeff Love  5:27  

I have been practicing this is a 12 years solely in real estate and corporate transactions.

J Darrin Gross  5:36  

So you mentioned the the range of clients you deal with, is there a typical client that you work with?

Jeff Love  6:46  

 There really isn’t, you know, it’s it’s fun. And that’s I think that’s part of the part that’s that’s fun to me is, you know, I’ll give you an example is we had a client that acquired a three unit triplex and they tore it down and built townhomes. And that was their first project, really young guys graduated from USC, and grad school. And now they’re, you know, years later, they’re a much bigger client doing, you know, developing 50 unit apartment buildings. So one of the nice things is, when we have smaller clients, a lot of times, they’ll grow into much bigger, bigger clients, and we’ll get into different deals with them. So we really do work with a range of clients. And that’s, that’s one of the things I like about my practice is it’s, you get to see issues from small and large and really past past the lessons on from those that have gone before you and then experienced on to those new clients starting out to try to guide them to make sure they’re not making the same mistakes.

J Darrin Gross  7:44  

So let me ask you, I mean, cuz I love that as well about real estate is if you have somebody who starts off small, and before you know it there, they can grow and have a significant portfolio. And, and, you know, and I think one of the things that that I’ve seen over time, and I’d be curious, from your perspective, as an attorney, when when someone starts out is just kind of a smaller entity, maybe they start off as an LLC, solo, or single member entity and that, how am I moving from, you know, that operation to a larger operation? Is there a lot of strategy that you guys work through in the beginning to try and, you know, bob and weave as they grow, so you don’t get caught in any of the potential issues? If they, I mean, I think it’s more what I’ve seen is if you’re a C Corp, or something like that, where it can be more troublesome, but are there some deep dive strategies that you guys get into for that?

Jeff Love  8:48  

We do. And I think it’s a lot of high level planning. When you start your first project, we’ve had clients that, you know, I hate to say it, but watch HGTV, and I’m going to go and I’m going to flip my first house, and they just jump into it. And, uh, you know, for the most part losing money, because you haven’t really evaluated underwritten the property, but getting a wild and crazy start like that. And then as you learn from that project, and you know, if you do it right, you’re going on to another one, a bigger one, multiple projects. It’s really evaluating many things. One is you have the right corporate structure, which you alluded to us C Corp often isn’t the right structure, because you’re, it’s inflexible, with real estate, you paying a second level of corporate tax, you really want something with paths to taxation that’s easy to bring partners in and out. If you have investors, maybe you want to especial waterfall with how you’re distributing cash flow and profits. So making sure you have that entity in place. And as you grow really thinking at a high level, where am I going with this company? Do I have a three year five year 10 year plan? Do I have a partner and if I do have a partner Do they have the same plan? Yeah, I have clients in the past where maybe one of one of the two partners is younger and one is older, and the younger one wants to keep pumping money back into the company and grow it, while the older partner is thinking more about retirement has exit planning, wanting to get that cash flow and you know, enjoy retirement. So it’s making sure that as you grow, and as you look at this company, from a high level, that everyone’s on the same page, with a strategic progression throughout the company’s lifecycle, or the investment properties lifecycle.

J Darrin Gross  10:33  

Yeah, I remember years ago, I had a customer and, you know, as an insurance broker, you know, we, we get introduced to a lot of different topics, obviously, succession planning, and in the conversation of life insurance comes up in that, but one of the very few customers I can recall that actually had a plan. A, you know, in the beginning, and it was kind of the the reference point for any, anytime anything came up on it, it was about how do we undo this thing, that was basically the rule one in his eye was, you know, you start business with a very clear plan of how you’re going to get out of business. And it made it very clean When, when, you know, years later, the two partners decided to go their own way. And, you know, because they, they had instilled the plan, they had revered the plan, they updated the plan. And it was, it was a kind of a more of a living document, as opposed to something that was nobody could remember where it was or what it said kind of thing. So it’s good.

Jeff Love  11:39  

That happens a lot. You know, I think it’s hard to plan out the next 20 years of a real estate investment at the outset. If that’s what your goal is, or if it’s value add. But it’s, it’s being able to have that flexibility to be fluid as things change, or maybe one investor partner wants to leave and you’re able to bring in another one. But it’s thinking through some of these issues at the outset say when it when it does come to fruition? If it does, you know how to handle it.

J Darrin Gross  12:08  

Right. So on that note of partners, and one of the the topics here I’d written down, was the gone but not forgotten. What happens to your partner share in your business when they leave or die? Can you address that?

Jeff Love  12:29  

Absolutely. It’s one of the topics, you know, it’s a hard topic to discuss with people, because what it means is, you know, what we’ve just been talking about, you know, say we’re partners, and we know one of us is older, and you know, God forbid, something happens, one of us passes away, we become disabled, we get divorced, how does that affect our partnership, you know, if we’re syndicators or developers, and we have a company together, especially if it’s just two partners, because you have that 5050, you know, inherent conflict, how does that get resolved? And a lot of times when we have new entrepreneurs, new real estate investors, they want to partner up, it’s, it’s a conversation to have is, what happens if that partner is gone. So for example, your partner, you start a real estate investment company, you buy a five unit building with a partner, that partner passes away. Well, this his interest, go to his his children. This is an interest go to his spouse. If it’s an operating company, and you’re actually doing further projects, and you’re actually working for the company, rather than a passive investment, it becomes a really important question. Because that partner, spouse or children, they may not know about the business, they may not bring anything from an operational standpoint. And you may not get along. I mean, you may be you love your partner, but she can’t stand his wife or his kid. So what we talked about is called a buy sell agreement. And it’s commonplace with a partnership or an operating agreement. And what it does is it It outlines that what’s going to happen, call it your business, your business prenup. And it says, if someone dies, does the company have to repurchase my shares? Does it have the option to do it? Can I can I use life insurance to defray some of that cost? Are the payments paid over time? And it really goes through set triggering events like a death a divorce disabled, someone wants to leave the company and you plan out ahead of time? What’s going to happen to that equity or those shares in that company and figure out how we’re going to value the company, how are we going to repay that. So there isn’t a big dispute in the life of the company in the you know, the fact that the company will continue is insured because we’ve dealt with these hard issues up front. And there’s not a fight when some unfortunate event occurs in the future.

J Darrin Gross  14:51  

Yeah, I can tell you firsthand, I’ve seen it up close and personal. I question for you Would you? Well, I guess I’m trying to think of the ways. So, two partners, one’s a majority shareholder, the other one’s minority shareholder, you’ve got the majority shareholder is well capitalized, the minority shareholder is not so well capitalized. In my experience, I’ve seen the majority shareholder not be so concerned about the event, recognizing that if a minority passes away, or whatever drops out, a check could be written or something along those lines. But the minority shareholder, I would guess, is kind of more of the the vulnerable one in that. That situation, but I’m kind of curious, do you? Have you had any experience with just that the unequal I guess, ownership percentages is that is that anything you run into? 

Jeff Love  15:56  

It does, it happens a lot. And not just the unequal ownership of partners, relative capital positions.  We had, we dealt with the similar situation last year, where it This was a 5050 partnership. But one partner was a billionaire. And the other partner was was not by a by a large margin. So it was much easier for one partner to write the check than the other one. And your example, yes, often the majority partner is less concerned. But in real estate, it’s important because they may not have that immediate liquidity to do it, if we’re partners, and we’re invested in, you know, $10 million for the buildings, but all of our money is tied up in these buildings, we may not have a check Director $3 million to write to our minority partner without refinancing or recapitalizing our property. So in that context, it still could pose a difficulty. And even more so for the minority partner, because they may not have the cash flow to buyout the bigger partner. So it’s, even if it’s majority versus minority, it’s something to think about, especially in the real estate context. And one of the ways to deal with with that, especially a death is in your neck of the woods, and is thinking about what you know, well, it’s not property insurance, but life insurance, can we buy that on a partner, or on each other, to help defray some of that cost. So we’re not going to have to sell one of our properties or liquidity at an opportune time, if something like this were to happen, so it’s thinking about all of these events ahead of time, and making sure that, hey, if I am the minority partner, do I have the money to buy you out. And if I don’t, am I able to structure that over a longer payment period, or use something like life insurance to help defer some of that initial down payment to redeem your equity stake in our partnership?

J Darrin Gross  17:51  

Again, just to you know, that that issue of you love your partner, but have so much the, the family or you know, the other parties or whatever, I mean, you get your own family kind of thing. And it just from experience, I can tell you, it gets really messy and and if you don’t have it sorted out, it can be messy, expensive, long, protracted disruption to your life. So I would highly encourage you to sort that out front. 

I want to ask you, so on on these other a couple of topics that I had written down here, lease purchase, or excuse me, let’s look at the purchase agreement. In commercial real estate, what what, what to look for in a purchase agreement or commercial real estate transaction? Can you point to some some key things that you would encourage the listeners to look for?

Jeff Love  18:48  

Sure. You know, it’s with real estate investing, it’s hard, because you’re really focused as the investor or sponsor developer, you’re really focused on getting the deal done. And you may overlook things like the purchase agreement, this is a form document my broker gave to me are the seller proposal, what’s the big deal, but that’s where a lot of issues come up. You know, what one of the big issues is, is a limitation of liability in the commercial context. If sellers often want them, they want to be able to wipe their hands of the property when they’re done. They don’t want you coming after them suing them for a substantial portion of the purchase price a year later. And it’s a fair concern. But from the buyer standpoint, you also want to make sure you’re protected. You may have done a great job doing due diligence, but you weren’t able to discover some some side leads the the seller had or some environmental concern and it comes to light later. You want to make sure that you’re adequately protected, and that you can, you know, get justice from the seller and make sure that the value you paid is the value that that’s fair. So that’s one of the areas that’s really negotiated is is there A fair cap on seller liability, you know, we see anywhere from two to 5% on multi million dollar deals, but it really ranges. And is there a time period when we can make these claims, if I’m selling a property, I eventually want to be able to keep it in the past, you know, I don’t want to claim from a buyer to come three years in the future. So I’m really going to do have my attorney or broker really negotiate this and say, Can we cut off any claims after six months or 12 months, 18 months. And so I can draw that line in the sand and say, you know, that’s my period of exposure after that I’m done. And the same thing with the buyer side buyer, you got to get in there, you got to do your due diligence, know your property, if there is a claim, you have to bring it timely. So I think that’s one of the big contention issues that we see with purchase agreements. Another one is dealing with representations and warranties, which I think is, is really important. You know, in smaller deals, single family properties, you really don’t get into them as much. But as you start to grow in commercial, industrial, a large multifamily retail office, you’ll really see representations and warranties from the seller and to lesser extent the buyer that talk about what is as the seller operating the property in the ordinary course of business, does he does he know anything? Is what you’re really trying to get at? Is he aware of any environmental concerns with the property? Does he have the right to sell a property, he doesn’t know if any tenant is filed for bankruptcy, and going through certain important questions that what you may touch on them on your due diligence, this is your opportunity to really ask questions of the seller, and have it in writing where where he or she is standing behind it. So that’s probably another area in your purchase agreement, it’s really worth taking the time to understand and see what’s in there. Because this is what protects you post closing sellers made certain representations. And those are the ones that survived the closing for that time period, you’re able to make a claim after the fact if need be.

J Darrin Gross  22:10  

Is there a you know, I’m assuming that each case is different, but is there a range of time for these types of matters to for the exposure to be still open, as far as if you’re the purchaser, if you’re if you’re the buyer, as far as you know, your window of discovery is or is or kind of a standard window for some of these things.

Jeff Love  22:39  

You know, it really depends on the owner, because, you know, if you’re an absentee owner, or if you say you have an industrial property is leased, you may not really get in there and know your own property tenant may not bring certain things, your attention. versus if you’re buying you a duplex as a small real estate investment, you may you may really get in there, you may have vacant units, you may play around with your your sink, you may do a survey and really get in there. So it depends, I think on the asset class and the involvement of the buyer, but you so you really need a minimum of six months to get in there and get familiar with the property post closing, let it run under your books for a while. So when we negotiate representations and warranties on either side, we try to stay in that short window of six months for a seller, and then you push it out to 18 months for a buyer and negotiate somewhere in between. Because the real key with real estate and negotiating purchase agreements, you know, leases, even by cells is being reasonable and finding that compromise that works for both the buyer and the seller. That’s your best, that’s your best deal.

J Darrin Gross  23:53  

Yeah, like I just sitting here thinking of some different transactions that I’ve been a part of, and I mean, the environmental thing you bring up is definitely one that’s tends to have kind of a longer seems like a longer due diligence based on just even the lenders are are pretty particular about you know, making certain that they’re not going to be lending on a problem becomes their problem. Down the road. Curious on the purchase agreement. You know, we’re talking essentially, about some of these due diligence things. I think so often due diligence is thought of by Real Estate Buyers is more of the physical asset due diligence, you know, the structure or the age and condition of of things that you know, repair items that may need to be taken care of or addressed. Is there a like a checklist or some things that you find that that you know are common that buyers don’t look for or should look for For or, you know, any, any kind of best practices with respect to more of the contracts on a due diligence kind of thing like said, I feel like most often I feel like people frame it in more of a, a structure that, you know, the physical aspect of the transaction as opposed to the written part of the transaction.

Jeff Love  25:23  

You’re absolutely right. You know, a lot of especially newbies will look at, you know, I knew my physical inspection, and and did I do the financial underwriting? You know, what are my rents? What am I paying, what are my costs, but there’s a lot more to underwriting a property, especially for a due diligence standpoint, and from a legal standpoint, you know, one of them is that I look at environmental concerns, you know, clearly think if I’m buying a retail property, and there’s a, there’s a drycleaners, or a gas station, it comes to mind. But what happens if that gas station is behind your property or across the street? Has there been groundwater migration because your next door neighbor, dirty user, because it’s under your property, your tenants get sick, or there’s an issue it can fall on you. So you hear phase one a lot. And what that does is, you know, it’s an inspection, it takes time to work on your due diligence, but it’s meant to protect you and really understand the environmental aspects of it, you know, did you really look at the title and survey, or have your advisor look at it. Now, I’ve had a client buying a building now. And there’s a there’s a deed restriction on this industrial building, where it’s from 1924. And it says you can’t serve alcoholic beverages from the premises, and it’s actually still valid. So while it didn’t immediately affect him, if he wanted to open a tap room, or have a tenant there were serving alcohol, it’s forbidden. And if it’s got a pretty severe, you know, violation, if you violate that it’s there’s there’s a reverter, which means a property can technically revert to that owner from 1924. Or it’s theirs. Yeah, it that seems pretty wild. But there there are, there are cases like that, and we’ve run across them in different aspects. So if you’re not really looking at your title, commitment, or preliminary report, depending on the state you’re in, and just looking at the exceptions, the title that the title company is not going to protect you over. But print those underlying documents and see what they say, you know, you’ll be surprised with some of the restrictions that are in there. And it’s something that you would have no idea if he just looked at your physical inspection, you wouldn’t get it from an environmental report. So you really got to hit all of these different areas, and you do diligence, you do your physical, you do your financial, you do environmental, you do title, maybe you do a survey, depending on the property type, because you want to make sure there’s no encroachments, your neighbor’s not going to make you tear down. That expensive shed in this bill or this parking structure, because it encroached onto the onto their land. And then, as you said, really understanding any contracts are their contracts that I have to assume as the buyer, because it’s a larger building. What about the leases? Do I understand the leases, and that is my tenant, have I gotten an estoppel certificate? What what that is, is it such a certificate that says the tenant is telling you, the buyer, what’s in the lease, my lease is in full force. In fact, I paid read through so and so date, I’m not aware of any defaults. And it’s an important document to get because we’ve had situations where the buyer is under the understanding on a multifamily property with this sort in case there were three tenants. And one of them had us had a side letter agreement that wasn’t part of the lease the landlord, you know, there was a death. And it was the mother that did it. He wasn’t really aware of it. But there was a side letter that granted his tenant, the right to lease the property for five years, at probably 25% of fair market value

J Darrin Gross  29:01  

25% of

Jeff Love  29:03  

25% of fair market value at the time, and it wasn’t in the lease. And the seller wasn’t even aware of it because it was his mother mother that had the fortune to seize. So if he had had an estoppel certificate in attendance said, I have this probably wouldn’t have bought the property. And if you’d asked me to establish a certificate and a tenant hadn’t written that down, then the tenant wouldn’t be able to say they had it three years he’s bound within this document. So from a contract perspective, really understanding your contracts, and some of the legal means that you’re really able to use as the buyer or the seller, to benefit yourself in that transaction to make sure you really understand what you’re buying to avoid problems that can inherently come down the road.

J Darrin Gross  29:52  

Let me ask you on the estoppel. Is it is it an estoppel agreement or what’s the proper word? What is estoppel we

Jeff Love  30:02  

call them estoppel certificates sort of, and the main is what it sounds like. It’s called estoppel. It’s the legal language, but the tenants is stopped from, from denying what they put in this agreement. So if they write, this is my lease and they sign off on it, they can’t later claim that, oh, that’s not true landlord buyer, sorry, there’s other documents my lease, they’re stopped for changing what’s in here, because they’re making representations to you as the buyer, and oftentimes on a refinance, they’re making those representations to a lender.

J Darrin Gross  30:35  

Gotcha. And is it? Is it ever the case that the seller will do this pre listing? Or is that that I feel like that may give rise to, you know, unsettled tenants if you if you do that is it more common when when there’s a purchase sale agreement between the buyer and the seller, the the certificates or the or the attempt to get the estoppel certificates is is handled?

Jeff Love  31:05  

It’s usually during escrow for the one of the reasons you mentioned, if you don’t have an impending sale, you don’t necessarily want to alert your tenants get, you know, have them concerned that there’s a new landlord that may not be as friendly or accommodating as you are. And as the buyer, you also want it to be current. So if the seller got the six months ago, that doesn’t help me understand, they’re the current on rent, I want to know if I’m buying a building in August that they’ve paid through the month of August. So I want that to be probably within 30 days as the buyer, but it’s something to be aware of it takes you know, it takes time. You police may not require attended to give one commercial tenants, they may have 10, business days, 20 days to get it back to you. And with large multifamily properties, you just say you’re buying 100 unit apartment building, you just may not physically be able to get them from all all the tenants. So it’s something to consider when you’re even drafting a purchase agreement, or LOI a term sheet. When you’re talking about your due diligence time period, if I’m gonna have time for this, even more so in the current, you know, climate we’re in with the covid 19 pandemic, you may not be able to reach your meet, you might not go reach tenants set pennants may not be as willing to give you documents or exchange things, you may not have access to their units and due diligence. So it’s really thinking ahead in terms of timing, and the established certificate is one of the items that does have a lead time to be able to get it back and, and really read and decipher what’s in there.

J Darrin Gross  32:42  

It’s been a little while since I’ve dealt with one of these, but I’m just trying to remember is that something that typically the buyer will stipulate in the purchase sale agreement.

Jeff Love  32:52  

Yes, usually will negotiate as part of a negotiation. Is the seller going to obtain it from the tenant? If the tenant doesn’t give you one? What happens do either either terminate the deal? Can a seller Give me one and the tenant instead? And if it’s a large property? Do I have to get one from every tenant? Or is there a certain threshold? Can I get from 80% of the tenants? 90%. So that is something that is negotiated up front in the purchase and sale agreement?

Unknown Speaker  33:21  

Got it?

J Darrin Gross  33:24  

There’s a note here about negotiating a lease on your terms. I’m curious to see, you know, a lot of times, uh, well, let me ask you for it from an investor standpoint. As opposed to the tenant standpoint, what are your Do you have kind of a frame of reference, you know, for for a good guide on how to handle that.

Jeff Love  33:54  

It depends on the typical lawyer responses depends. One of it depends, are we talking about our residential lease or commercial lease? But I think from an investor’s standpoint, if you’re acquiring a building, it’s your first job is to understand your lease. If it’s a residential lease, what constituted tenants default? How long is the lease? What’s the term look at your financial appointed, you know, financial parameters? Then take a look at the legal side. Is there an indemnification provision? What is the 10 and a half to repair and really understanding there’s material facts and when you’re negotiating a new residential lease is making sure that it protects you as the landlord, but it’s also you also want to be you know, I think kind of the overall game is be fair to the tenant. But making sure you really understand those default provisions because from a residential lease, tenants often they may not have the financial wherewithal of a large corporate tenant, and if something goes wrong, he may just want to be able to get them out of the property. So understanding the default with Commercial lease. Again, investor, you want to understand the deal and what’s in the lease. But also look at those bigger points, does the tenant they obligated to give me an estoppel? certificate? What what costs? Am I able to pass through to the tenant? is this? are they paying me a gross sum? Like a residential lease a fixed amount? That’s it? are they paying me a pass through? So understanding the financial parameters? Understanding? If is there an indemnity provision where they’re going to protect me? If something happens in their building? I’m not liable for that. Is there a limitation of liability? So looking at it, not just from a numbers standpoint, underwriting, but looking at it from? What’s my exposure? What’s my risk exposure? If, if a tenant is a I’ve got a big tenant, and a pipe breaks, and it floods their space? Can I? Am I liable for that anyway, as the landlord and investor? Or if insurance doesn’t cover it? Do I have exposure? And can the tenant come after me for what’s called consequential damages, which is, it’s the nasty type of damages, because what that means is it’s not just pipe breaks, I got to replace the clothing, so I got to replace their clothes. But the consequential damages, you want to make sure that way. Because that type of damages, it’s the unforeseen damages, the tenant had a shirt in the store was worth 50 bucks, but it was going to it was special, it was going to be worn by a movie star was going to get the tenant national exposure. So you cost them a million dollars in free advertising. Now they’re suing you landlord for a million dollars, going through the lease and understanding that. And if you’re negotiating a new lease, again, be fair meet in the middle, but negotiate those points that actually have a financial business legal impact to you, and don’t always sweat the small stuff, look at what’s actually going to have an impact on your pocketbook or actually expose you to risk.

J Darrin Gross  37:01  

Let me ask you on the lease, as an insurance broker, we typically receive the lease and have to provide proof of insurance, you know, liability, naming the landlord is an additional insured if it’s a commercial lease for the tenant kind of thing. But I’m kind of curious, there’s always a clause in there. That seems like it’s a catch all. And, you know, if, if this doesn’t remedy it, and if that doesn’t remedy it, then we’re going to hold you responsible is that? Am I making something up? I’m not looking at least right now. But it seems like there’s always some sort of a, I can’t remember the phraseology, but I remember years ago, having a situation that was not covered by insurance. And it ended up being the tenants responsibility, you know, damage to a building kind of thing was a weird deal. But, I remember the the the landlord’s representative point to this, this section in the lease? Does any of that make any sense to you what I just said

Jeff Love  38:15  

it does. And, again, another reason to understand the lease, a lot of times you will have the insurance provisions, you’ll often have a waiver of subrogation, which means you know better than I do, but insurance company is not gonna come after you if you’re covered. But what happens when there’s a gap in insurance or something was unique, you didn’t have insurance, a lot of times on the leases read, you know, beyond if insurance doesn’t cover it, landlord or tenant are ultimately going to be responsible, the burning bills did burns down, and there’s a million dollars in coverage. And it costs a million and a half to rebuild, someone’s going to come up with a half a million dollars. And that’s where shifting the risk and exposure comes to play in a lease. Is that the landlord’s responsibility or the tenants? And even then, if it is the tenants? Is it from any action that tenant takes? Or is it have to be some type of standard? Is it because the tenants name that was of course negligent or negligent or willful misconduct? So you’re absolutely correct. It’s in the lease. And it’s, it’s, it’s another area that’s negotiated, because it’s a shifting of risk. A lot of times with building damage, it is going to fall on the landlord as we try to represent tenants and vice versa, but if the tenant does something out of the norm and they were negligent, then that whole cost is going to get switched over back to the tenant.

J Darrin Gross  39:38  

All right. Yeah, I think that’s kind of what this situation was. It was a little bit unique. But I think it’s the indemnity clause if I’m remembering right was kind of the where they kept pointing to was, hey, read this kind of thing. And, and so that’s, that’s how I got settled. Jeff, if we Could I’d like to shift gears a little bit here, kind of along the same line, we’ve been talking about risk and that as we’ve been talking by day, I’m a, I’m an insurance broker. And I work with my clients to assess risk, and determine what we can do with the risk. And there’s a couple of different strategies we consider. The first is we look to see as a way to avoid the risk. If that’s not possible, we look to see if there’s a way to minimize the risk. And when we can’t avoid it or minimize it, we look to transfer the risk. And that’s what an insurance policy is. And I like to ask my guests, if they can take a look at their situation with their business, their clients, you know, the real estate that they they interact in? And if you’re able to identify what you consider to be the biggest risk. And just for clarification, I’m not looking for necessarily an insurance related answer. But if you’re willing, I’d like to ask you, Jeff Love, what is the biggest risk?

Jeff Love  41:15  

To me, it’s the same for me, because I’m a real estate investor myself, as well as advising real estate investors. And to me, the biggest risk with with real estate is exposing my non real estate assets to a real estate related risk. And what I mean by that is, if I own a two unit apartment building, and the tenant has a party, someone slips and falls. Now I’ve got, I’ve got, I’ve got a claim against me as the landlord. It may be a really bad fall, someone dies. And they may want to they when they want to sue me.  It’s a $5 million claim. Now, I may have insurance, which I hopefully do, get it from someone like yourself, and that gives me protection. But what if that insurance isn’t enough? You know, my property insurance, my umbrella? That only gets me to 3 million? How do I protect myself because I don’t want my bank account. I don’t want my car, my kids college bonds my home, I don’t want that exposure for one particular investment, real estate, just one aspect of my portfolio. I want to try to keep it contained. And one of the ways we do that is through insurance. And that’s you know, that’s my, you know, first answer. But insurance may not may not always cover, there may be an exception. So how do we go one step further, and to our clients. That’s part of our corporate practice or entity structuring and what those limited liability companies give you our limited liability, whether depending on what the form, whether it’s a corporation, a limited partnership, and LLC, what that does is say, my exposure is only the company, I can’t unless I do something wrong, and it pierce the veil, myself as the owner of that company, you can’t come after my personal assets. So I take my two year apartment building, I put it into Jeff’s LLC. Now there’s that slip and fall, they may make a claim against me, they may get my $3 million insurance coverage. And they may take the property to cover the other $2 million of the claim. But that’s all I lose, I don’t lose my car, my bank accounts. That’s all safe. And to me, that’s the biggest risk is being able to really mitigate the risk of each property and segregate my assets to make sure that if one card falls, all of them don’t. And so what we do with clients is help them segregate those risks, maybe even have different properties in different companies. One has specific environmental risk. Maybe one is an apartment building with lots of tenants and other Amazon deliveries, we want to keep that separate from my industrial property that’s worth a lot more money or my personal assets. So I think that corporate structuring and understanding what an entity that grants limited liability protection, the benefits that that can really give you in mitigating risk and exposure.

J Darrin Gross  44:14  

Now, that’s those are good points. years ago, I was had to testify in a lawsuit one of my clients was injured is not an automobile accident, but I remember the the party that was at fault, their policy was basically a minimum limit thing and the company wrote the check and said, you know, good luck, they’re out of the claim there. And literally it was after that, that the judge in, you know, the settlement was basically looking at all of the other assets, like you’re describing, and liquidating, or you know, the the at fault party, you know, could seek financing or loans against them or whatever but but you know, Beyond insurance, you are or can be held responsible, or at least the entity the responsible party can be held responsible. So it’s, I appreciate you making that point. So, Jeff, where can listeners go if they would like to learn more connect with you?

Jeff Love  45:20  

I am on social media, please check out our website. www.gibbsgiden.com. Feel free to email me anytime. jlove@gibbsgiden.com  also on LinkedIn. Give me a call. Always happy to answer questions.

J Darrin Gross  45:35  

All right. Well, Jeff, I can’t say thanks enough for taking the time to talk. I’ve enjoyed it. learned a lot. And I hope we can do it again soon. 

Jeff Love  45:45  

Likewise, thanks so much.

J Darrin Gross  45:47  

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CREPN Radio.

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